Matter of Chen, 243 A.D.3d 446 (1st Dept 2025)
George Michael and Justices Kern, Friedman, Kapnick, Shulman, and Hagler agree on one thing: you gotta have faith. The real question is to whom that faith belongs.
For George Michael, the answer is yourself. Think twice before giving your heart away. Know the games being played. Do not let emotion take over.
New York law takes a different view when it comes to trustees. Trustees owe a duty of loyalty to the trust and its beneficiaries, not to their own interests. That duty is strict. Trustees cannot put their own interests ahead of the people they are supposed to serve.
When a trustee does not meet that standard, the consequences can be significant, including the possible loss of commissions. New York courts apply what is known as the “faithless servant” doctrine, which allows recovery of compensation paid during a period of disloyalty. The Chen case confirms that this principle applies in the trust context.
The case also shows that a trustee may have to return commissions even if the trust cannot point to a specific financial loss.
The Facts
A grandfather created a trust for his grandchildren. Two of his sons served as co-trustees.
For approximately 16 years, one son (Son #1) deposited trust funds into joint accounts with his children, who were beneficiaries of the trust. According to the allegations, Son #1 did not disclose the existence of the trust to them and withdrew funds from those accounts for his own use.
Son #1’s children eventually discovered what happened. In 2016, after hiring lawyers, they reached a settlement with him. He paid them for the harm they suffered, and they agreed not to bring any further claims against him.
After his death, however, the other son (Son #2) and Son #2’s children filed a petition against the estate of Son #1. They sought to recover all commissions Son #1 received during the period when he allegedly diverted trust assets. The amount at issue was approximately $1 million.
The Surrogate’s Decision
The Surrogate’s Court dismissed the petition.
The court found that the issue had already been resolved by the beneficiaries directly affected, the children of Son #1. Those beneficiaries had settled their claims and agreed not to sue the trustee again. The court also found that the co-trustee, Son #2, and his children were not impacted by what happened with the joint accounts and therefore could not bring their own claims based on that conduct.
The First Department’s Decision
The Appellate Division disagreed and allowed the case to move forward.
First, the court said the earlier settlement did not apply to people who were not part of it. Because Son #2 and his children were not included in that agreement, it did not prevent them from bringing a claim.
Second, the court said Son #2 and his children could seek to recover Son #1’s commissions. It pointed to the fact that Son #1 was paid commissions at a time when he was allegedly breaching his duties. According to the court, that alone was enough harm to the trust to support a claim.
This matters because it allowed the case to continue, even though Son #2’s children were not directly affected by the diverted funds.
The Takeaway
Matter of Chen offers several practical lessons for trustees, trust officers, and the professionals who advise them:
- Commissions must be earned through loyal service, not just by holding the role. If a trustee is acting in their own interest, misusing assets, or otherwise going against the trust, they should expect that any commissions earned during that time may have to be returned. This can happen even if the trust cannot point to a clear financial loss.
- A private settlement does not end everything. If a trustee settles with certain beneficiaries, that agreement does not bind the trust itself or other beneficiaries who were not part of the deal. Trustees and their advisors should not assume that resolving one dispute eliminates all potential claims.
Matter of Chen is a reminder that fiduciary roles come with real consequences. A trustee who uses their position for personal gain may be required to repay misused funds and give back the compensation they received during the period of wrongdoing.
For estate planners and trust officers, the case reinforces a simple but important truth: a trustee has gotta have faith. No after-the-fact settlement will erase what was done in the shadows.
You know, not everybody has got a blog like Thicker Than Water. We will return.
